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Did you know that the right CFO can increase your cash flow, increase passive income, and help you cut your taxes? It’s true! How, you ask? Through real estate.
There are many benefits to generating passive income from real estate.
When it comes to taxes, there are many different ways to reduce your overall tax liability. One way is by using losses from rental properties to offset your income on your 1040 form. A good CFO should know how to do this.
Here’s how this works: If you have a net loss of $5,000 after accounting for depreciation and other deductions associated with the property, you have earned an extra $5000 in pre-tax wages!
What does this mean? The losses reduce your taxable and self-employment income while still providing an additional cash flow of $5,000.
It would be best if you overcame the passive loss tax code rules.
Here are some crucial points.
Keep a time log. Make sure your time log proves you pass the
1. more-than-half-your-work-time test,
2. more-than-750-hours test, and
3. material participation tests for each of the properties, or group, if you elected to group them.
The tax law contains seven possible material participation tests. You materially participate in a property if you pass any one of the seven tests. But realistically, it’s likely you have only two of the seven tests that apply, as follows:
- If married, you (and your spouse) materially participate in a rental if you substantially perform all the work on the rental.
- If others participate in the rental, you (and your spouse, if married) materially participate if (a) you participate in the rental 100 hours or more and (b) no other individual participates more than you.
Consider this example. You rent out a single-family home. You hire a gardener who comes weekly to mow the lawn and take care of the landscaping.
To materially participate in this rental
- you must materially participate for 100 hours or more, and
- that must be more than the gardener spends working on this rental home.
Do you have proof? You need proof of not only your work time but the work time of your gardener. A good CFO will know how to do this. We do.
If you would like to discuss this and other tax strategies, please book your tax assessment here.